Inflation report on Valentine’s day

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Investors will try to get more clarity on market direction this week following the release of key inflation data on Valentine’s Day. While January consumer prices are forecast to climb 0.5% M/M for the first time in three months, the annual rate is expected to fall again to 6.2% Y/Y, continuing a decline that started in mid-2022. Keep an eye on the “core” rate as well, which strips out volatile energy and food prices, and is closely watched by Fed policymakers for its inputs on housing and other key parts of the economy.

“Inflation swaps, bonds, options suggest that CPI could come in hotter than expected,” writes Marketplace author Mott Capital Management, adding that the January CPI report could be a massive shock to the market. Others believe that the market is not living in fantasy land following the big rally in January, like contributor Eric Parnell, CFA. He says that while the Fed is likely to raise rates, and keep them higher for longer than expected, this is in fact positive for the long-term and investors are best served to remain fully allocated to equities.

Pick a side, but whatever you believe, intraday volatility has been significant on CPI days in recent months. Things could get even more complicated when factoring in the new weightings of the Bureau of Labor Statistics, which will now base consumer expenditure data on a single calendar year, instead of every two years. In addition, the “new vehicles” category will implement a methodological upgrade to factor in the most recent cyclical trends and short-term fluctuations.

Outlook: In recent weeks, Fed Chair Jerome Powell has stressed that there is still a long road ahead on dealing with inflation, rather than an instant on/off switch that would result in easier investing decisions. “The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” he said at The Economic Club of Washington, D.C. “But it has a long way to go. These are the very early stages. The reality is we’re going to react to the data, so if we continue to get, for example, strong labor-market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in.”